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Cash Management
AASBO Certificate
Program
April, 2013
Cash Management
Effective cash management is more important today
than ever before. This session will develop
specifications for the selection of banking and other
financial services, discuss the concepts of
compensating balances, cash flow analysis, account
analysis statements and investment guidelines.
Session will focus on effective cash management
practices and the utilization of banking products and
services for an more efficient business operations.
2
Cash Management
Developing a cash management program
Short Term Investment Program
Banking Services
3
Developing a Cash Management
Program
Improve cash management efficiency
Improve your operational efficiency
Increase your investment income
Provide benefits for your employees
4
5
Cash Management Efficiency
Objective
100% of funds are invested 100% of the time
at the highest rate of return with safety and
liquidity as the main drivers.
6
Developing a Cash Management
Program
Maximize return on idle funds
Invest excess funds daily
24 hours invested “ adds up quickly”
Make your money work for your district
Improve Your Operational
Efficiency Cash Receipts
Procurement
Disbursements
A/P
Payroll
Administrative Services
7
8
Developing a Cash
Management Program
Bid or negotiate your banking services
Identify banking institution that will provide the
highest quality of service at the lowest cost to
the board
Develop an investment strategy
Understand your cash flows
Understand your investment choices
Develop an investment policy
Collateralization:
All deposits of the Board must be secured by
pledged collateral in an amount greater than
the highest balance during any month, or
deposited with a Qualified Public Depository
of the Security for Alabama Funds
Enhancement (SAFE) Program, according to
Sections 41-14A-2 through 41-14A-6, 41-14A-
8 and 41-14A-9, Code of Alabama 1975, as
amended.
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SAFE Program
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SAFE Program
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Cash Management Services
Collection Services
Disbursement Services
Information Services
Credit Services
Fraud Protection
Investment Services
15
Collection Services
ACH Collections
Zero Balance Accounts
Night Depository Services
Lock Boxes
Remote Deposits
16
Disbursement Services
Balance Reporting Services
ACH Payments
Electronic Payments
Account Reconcilement Services
Zero Balance Accounts
Wire Transfer Services
Overdraft Protection Services
17
Information Services
Account Reconcilement
Online Information Reporting
Electronic Storage of Banking Records
18
Credit Services
Lines of credit
Leasing
Short-Term Notes
Long Term Financing
Investment Services Investment Advise
19
Choosing Your Bank
Developing a banking relationship
Look for a multidimensional institution
Seek a bank that specializes in Public Funds
relationship
State of Alabama SAFE Program
20
How much should you pay for Bank
Services?
Pay fees direct?
Compensating balances to offset fees?
Lower investment rate?
21
Choosing Your Bank
How much should you pay for Bank Services?
Understanding the Account Analysis Statement:
AAS is monthly invoice provided by the bank that delineates the services provided and compensation required to pay for these services.
It is not a monthly bank statement.
If you are not receiving an AAS, request one from your bank.
22
Account analysis statements are issued periodically,
usually monthly. Relevant information reported in the
account analysis statement includes the following: the
company's average daily balance , average daily balance
on uncollected checks, Earnings Credit Rate (ECR) on
collected balances, account activity charges, and account
balances needed to pay for bank services ( compensating
balance ). An analytical tool mostly used in pricing cash
management services.
• Average Ledger Balance: The average balance maintained in a
checking account. It is the sum of each day's ledger balance divided
by the number of days in the statement period.
• Average Float: The sum of each day's ledger balance that consists
of uncollected funds divided by the number of days in the statement
period.
• Average Collected Balance: The average ledger balance less the
average uncollected balances.
• Reserve Requirement: The percentage of account balance
required to be kept on deposit at the Federal Reserve Bank.
• Investable Balance: The balance remaining after the reserve
requirement is deducted from the average available balance.
• Earnings Credit Rate:. ERC- A daily calculation of interest paid on
idle funds that reduce bank service charges. A calculated amount is
then used to pay for banking fees. r. The rate paid is often pegged to
the U.S. Treasury bill rate
23
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Sample Bank of Alabama
Account Analysis Report
ABC School District Statement Date
P.O. Box 156 From: 06-01-2012
City, Alabama To: 06-30-2012
Account # 0060510625
Average Ledger Balance $ 2,256,514.67
Less Average Float (773,398.31)
Average Collected Balance $ 1,483,116.36
Less Reserve Requirement (148,311.64)
Balance Available For
Investment $ 1,334,804.73
25
Analysis of Service Charges
Description Volume Unit Total Equivalent Price Price Collected Balance # of Accounts 2 7.50 15.00 $ 2,975.21 Maintenance Checks Paid 569 0.15 85.35 16,928.93 Deposits 21 0.30 6.30 1,249.59 Deposit Items 12,905 0.05 645.25 127,983.47 Wire Transfer 1 15.00 15.00 2,975.21 Services ZBA Account 1 75.00 75.00 14,876.03 Maintenance ZBA Account 76 1.00 76.00 15,074.38 Transfers Investment Sweep 1 100.00 100.00 19,834.71 Total Service Charges 13,576 199.00 1,017.90 $201,897.53
26
Components of Banking RFP
27
Introduction
Introduction
Objective
Selection Criteria
Length of Contract
General Terms and Conditions
Scope of Banking Services
List of desired services
How services should operate
What you expect from bank
28
Forms and Instructions
Clear and concise instructions
Standardized bid forms
Evaluation of Proposals
Established criteria
Disqualify incomplete proposals
Highest quality service at competitive price
29
Preparing the Request for Proposal
(RFP)
Allow adequate time (6-9 months)
Identify ways to improve procedures services
Local bank contact
Compare services used by other boards
Direct deposit payroll
Reconcilement Services
Purchasing Cards
Internet Banking
Remote Deposits
30
Use concentration/zero balance
account structure
Depository Accounts
General Fund
CNP Fund
Capital/Bond Account
Other
Disbursement Accounts
Accounts Payable
Payroll
• Establish what independent rate will be used for investment purposes (Federal Fund, LIBOR or 90-day T-Bill)
– In the United States, the federal funds rate is the interest rate at which private depository institutions (mostly banks) lend balances (federal funds) at the Federal Reserve to other depository institutions, usually overnight.
– LIBOR stands for London Interbank Offered Rate. It's the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in U.S. capital markets and can be found in the Wall Street Journal. In general, its changes have been smaller than changes in the prime rate.
31
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Schedule a pre-proposal conference ‒
One to two weeks after RFP has been issued
Three to four weeks before proposals are due
Establish minimum contract period
Two to three years with two-year option
Have signed contract (master agreement)
Allow 3-5 months to implement
33
I. DEPOSITORY ACCOUNTS
A. General Fund – This is a major account for the Board where the majority of receipts will
be deposited. This account will also receive ACH deposits from Federal and State
agencies.
B. Child Nutrition – This is the receiving fund for all school lunchroom activities of the ABC
County Board of Education. Deposits will be mostly in cash, but this account will also
receive some ACH deposits.
C. Capital Building Fund – This is the receiving account on accounts for bond proceeds.
These receipts will be by ACH or checks and be few in numbers.
II. DISBURSEMENT ACCOUNTS
A. Accounts Payable Account – Transfers are made to this account from the depository
accounts on a weekly basis to cover all checks written in accounts payable.
B. Payroll Account – Transfers are made to this account monthly or biweekly from the
depository accounts to cover all payroll checks and direct deposits for payroll.
•
34
Investment Program
For School Districts
36
Investment Guidelines
Types of Funds For Investment
Funds used for the operating expenses of the school district (General Fund)
Funds to provide for major expenses – Capital Outlay (Bond Funds, City Appropriations)
Surplus funds set aside for emergencies or contingencies (Reserves)
37
OBJECTIVES
Safety
Liquidity
Income / Return
On Investment
38
Safety
Credit Risk – Debtors will
fail to make timely payment of
principal / interest
Market Risk – Interest rate may
change causing a decline in yield
39
Liquidity
(The ability to convert the investment back to cash whenever the funds are needed)
Maturity of investment
Having enough funds coming due soon
Short term investment –
overnight investments, money market funds
Maturity pattern that always keeps some
assets that are close to maturity
40
Income or Return on Investment
Investment Reward (Profit)
The greater the reward the greater the risk
Cannot justify high-risk investments
41
Types of Funds For Investment
Funds used for the operating expenses
of the school district (General Fund)
Funds to provide for major expenses –
Capital Outlay (Bond Funds, City
Appropriations)
Surplus funds set aside for emergencies
or contingencies (Reserves)
42
Cash Flow Forecast
How To Invest
Cash Flow Forecast
Serves as an investment road map. You
construct it by compiling historical
information on receipts and disbursements.
Usually based on data from three years.
43
Cash Flow Analysis
Receipts Disbursements Available
Jan. $10 million $ 4 million $ 6 million
Feb. $10 million $ 5 million $ 5 million
Mar. $ 6 million $ 8 million ($ 2 million)
Apr. $ 2 million $ 5 million ($ 3 million)
May $ 3 million $ 6 million ($ 3 million)
June $ 4 million $ 7 million ($ 3 million)
44
Cash Flow Analysis
7,000,000.00
7,500,000.00
8,000,000.00
8,500,000.00
9,000,000.00
9,500,000.00
10,000,000.00
10,500,000.00
11,000,000.00
11,500,000.00
12,000,000.00
12,500,000.00
13,000,000.00
13,500,000.00
July Aug.
Sept.Oct.
Nov.Dec.
Jan.Feb.
Mar.Apr.
MayJune
Cash Flow Chart
45
Types of Investments For School Districts
Treasuries – Informal name for securities issued by U.S.
Department of Treasury
Treasury Bills (T-Bills)
Short-term obligations‒one year or less
Issued on discount basis
Issued in 3-month, 6-month, one-year maturities
Serves as benchmark for yields of other short-term, fixed income investments
Treasury Notes
Medium term obligations
Maturities one to ten years
Fixed face amount
Specified maturity
Specified coupon interest rate
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Treasury Bonds
Long-term obligations
Maturities greater than 10 years
Fixed face amount
Coupon rate of interest
Federal Agency Securities
Agencies created by the federal government to support the credit needs of specific institutes or groups.
Some are guaranteed by U.S. Treasury
Some are supported only by the credit worthiness of the issuing agency (Federally sponsored)
47
Certificates of Deposit
Time deposit with bank
Specified term
Must be secured
Rate – fixed or variable
Repurchase Agreements (Repos)
Board purchases securities from bank at specified interest rate and sells them back
Open repo is used most often by governmental agencies
Basis for daily rate (effective federal fund minus basis points)
Collateralized by U.S. Government Securities
GASB statement 31 disclosure requirements
48
Guidelines of Investing
Always buy every investment as though you will
hold it until maturity
Avoid investing all of your funds at once, especially if the environment is calling for an upward rate movement
Stagger your purchases (dollar cost averaging)
Never buy an investment expecting to sell it early
Create and follow a cash flow forecast
When in doubt DON’T
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Three Pitfalls of Investing
Trust…Greed…Ignorance
Trust
Always stay with investments with
which you are familiar
Always try to get at least two bids
whenever making a transaction
Be alert to sudden changes in your
broker’s advice or recommendation
50
Greed
Do not start searching for unrealistic
yields
Treasury securities should serve as
benchmark
51
Ignorance
Do not buy what you do not understand
Do not buy any investment that yields less than
its corresponding treasury
Government guaranteed does not mean risk free
When in doubt ask or research
52
Investment Policy
WHY Formal written policy is vital for prudent
investment management
Gives clear guidance
Communicates where the Board has chosen
to go with their investment portfolio
53
Areas you need to address in your
investment policy
What accounts are covered in your policy Who makes permissible investments and
what investments are included What are your investment objectives What are your Board’s prudence and ethical
standards
54
From whom will you purchase investment
securities
What are the safekeeping requirements
What are your diversification requirements
Have you established internal controls
What sort of ongoing evaluations and reporting
will be required
55
Sources:
Jeffry Flynn,
The Art of Investing School District Funds,
published by ASBO International.
Rhett Harrell, Editor,
“Government Financial Management Report”,
Sheshunoff Information Services, Inc.
Edmund A. Mennis and Leonard M. Matz,
State and Local Government Investment Guide Series,
Sheshunoff Information Services, Inc., 1996.
56
Sources:
Rhett Harrell, Banking Relations, published by Government
Financial Officers Association, 1986.
“Government Financial Management Report,” Vol.4, No. 12,
Sheshunoff Information Services, 1998.
“Cash Management and Investment Report,” Vol. 1, No. 6,
Sheshunoff Information Services, 1998.
Leonard M. Matz and J. Kimball Hobbs, State and Local
Government Cash Management Service, Sheshunoff
Information Services, 1996.